Warnings that the multi-billion pound programme to rebuild further education colleges was heading for financial disaster were ignored by the quango responsible for funding, MPs were told today.

Officials at the Learning and Skills Council preferred instead to believe a National Audit Office report which had given the scheme a clean bill of health, a Commons watchdog committee heard.

The Department for Innovation, Universities and Skills (Dius), which was keeping the LSC under constant scrutiny, also failed to take serious note of the warning, contained in a report in February last year – ten months before the programme was suspended.

Mark Haysom, the LSC's chief executive, told MPs he was unaware of the internal report's existence. It would have been seen by a Dius civil servant, he said, "but it obviously didn't surface at a senior level within Dius".

Haysom, who has since stepped down as the quango's chief executive, said the LSC's management had been preoccupied with several pressing issues last year, including what was going to happen following its abolition next April.

An affordability report – produced by one of the quango's directors in February 2008 – warned that the programme was heading for serious trouble, but did not sound alarm bells at the top of the organisation.

By September, people knew that the estimated costs of impending building projects had doubled from £8bn to £16bn in just a year. But no action was taken until December, when the scheme was frozen.

"The speed with which the situation changed was one of the most extraordinary things of the whole episode," Haysom said. "Up until the summer last year, it was very much as it had been over the [previous] five years, running well, and in budget."

Meanwhile, the LSC's attention was focused on what would happen after its abolition, which was announced in March last year.

Phil Willis, chair of the Commons Innovation, Universities and Skills select committee, asked him: "Are you saying that a major report that said it was unafforable never made it as far as your desk?"

"It didn't, and that's one of the big failures that's occurred here," Haysom replied. "There was a breakdown that happened and some of that is difficult to explain."

Haysom robustly refuted the suggestion that staff were too frightened to bring bad news to his attention. "I worked very hard to try to create a culture which was really open and where people could come directly to me," he said.

Why had he not picked up news of the report from minutes or agendas of internal LSC meetings where it had been discussed? MPs asked

"Forgive me, I was running a £12bn organisation," he replied. "I couldn't have possibly had sight of all papers coming to all committees."

A Dius civil servant had however seen the report when it was discussed at an internal LSC committee early last summer, Haysom said.

It was discussed at a number of meetings but was dismissed as not robust enough .

"That was exactly the time that we received a NAO report that had been crawling all over the organisation," he said "And they had found no cause for concern."

The LSC had always been intensely scrutinised by civil servants, and the scrutiny became even more intense after the "machinery of government" changes in October 2008, Haysom said.

"The impact of that was a kind of paralysis on the ability of the LSC to take its own decisions," he said.